E-Commerce Advisory Panel Threads Political Minefield

NEW YORK -- The Advisory Commission on Electronic Commerce walked a tightrope between policy and process this week as members of the panel wrapped up a two-day meeting without moving significantly closer to a recommendation to Congress on Internet taxation. Its deliberations demonstrated anew that cyberspace is the newest hottest tax policy battleground.

The New York meeting on Tuesday and Wednesday, shortened because of Hurricane Floyd-related travel problems, swung from a confusing discussion of technical issues to a practical debate over exactly what the group's congressional charter allows.

At issue: whether and how to tax access to the Internet and e-business sales and other financial transactions. Congress last year imposed a three-year moratorium on any new Internet taxes to encourage growth of the new technology, but in the process scared many states who depend on sales taxes to help balance their budgets.

The mandate of the advisory commission, which consists of a mix of business and political leaders, is to recommend a long-term Internet tax treatment policy.

"Nobody should believe that because this advisory commission is meeting that the skies are going to open up, that an angel is going to descend and that it is going to tell everybody here the answers to all these questions. It is not realistic and it is not reasonable to engage in fantasy thinking," said Virginia's Republican Gov. James Gilmore, who chairs the commission.

The storm menacing the eastern seaboard was reflected by a sometimes testy climate inside the Manhattan skyscraper where the meeting took place. At least two distinct factions emerged from the discussions.

One side, led by Utah Governor Mike Leavitt and Dallas Mayor Ron Kirk, wants to consider establishing a single Internet tax collection system for all fifty states.

Another group, represented by conservative Americans For Tax Reform President Grover Norquist and California Board of Equalization Chairman Dean Andal, argued that both Internet access and electronic transactions should be tax free.

Andal made the first official proposal to the commission, recommending that Congress create a series of "Internet safe harbors" from state and local tax collectors. He said his proposal was a viable alternative to overruling the Supreme Court and Congress, which he claims is precisely what those wishing to tax Internet commerce will have to do.

The Supreme Court ruled in 1992 that sellers who do business through catalogs or the Internet do not have to collect taxes for states where they do not have a physical presence.

While Andal admitted that his proposal does not have the two-thirds support necessary to be adopted by the committee, several commissioners voiced support.

"We should be asking if the entire sales tax system is salvageable. Saving a Depression era tax system and imposing it on the 21st Century isn't the way to go. I hope that our motto is 'taxes shouldn't shape the future of the Internet,'" said commission member Stan Sokul, a representative of the high tech industry.

State and local representatives sharply disagreed, saying that sales taxes play a crucial role in funding public services.

"Until the day that you buy a book over the Internet and it magically appears in front of you, it will still be delivered on roads that we have to maintain. State and local governments have to have the comfort that this is not a wholesale attack on the way we fund those things that are part of a social compact with our citizens," Kirk said.

This week's second of four meetings marked the first real steps of the commission in their task of making a recommendation to Congress.

The commission named a drafting subcommittee to write the report that will be submitted to Congress in April. Members are: Gilmore, Andal, Time Warner President Richard Parsons, Charles Schwab President David Pottruck, Washington Governor Gary Locke, Department Of Commerce General Counsel Andrew Pincus, Oregon county commissioner Delna Jones, America Online President Robert Pittman, and Association for Interactive Media consultant Sokul.

Before adjourning, the commission adopted a resolution backing the White House stance that a moratorium on international electronic transmission tariffs should be implemented and made permanent as soon as possible. It is intended to support the administration at this November's World Trade Organization summit in Seattle.

Members of the panel also received a sharply worded letter signed by 35 members of the House of Representatives warning that discussions should not focus on how to tax the Internet, but on whether to tax the Internet.

"The Commission should remember that only Congress can authorize one state to compel sellers in another state to collect Internet taxes," the letter read. Among those signing the letter were such powerful House members as Rep. Tom DeLay, Rep. Dan Burton and Rep. Rick Lazio.

The proceedings went ahead under a cloud of uncertainty regarding the commission's budget. On Tuesday, the commission adopted a spending plan asking for $1.4 million in Congressional funding despite objections of members appointed by the administration.

The budget relies on a $150,000 contribution from the Commonwealth of Virginia and $50,000 in contributions from each industry member; the hoped-for Congressional appropriation would cover the majority of the remainder.

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